Division of Water Resource Management Report: A-1112DEP-058

Review of Revenues and Expenditures for the City of Apalachicola Clean Water State Revolving Fund Debt Purchase Agreement Division of Water Resource Management Report: A-1112DEP-058 Office of Inspector General Internal Audit Section Florida Department of Environmental Protection November 20, 2012 3900 Commonwealth Boulevard, MS 40 Tallahassee, Florida 32399-3000 www.dep.state.fl.us

Report: A-1112DEP-058 Review of Revenues and Expenditures for the City of Apalachicola Water and Sewer Funds Related to the Table of Contents Overview..1 Scope and Objective.1 Methodology...1 Background.2 Results and Conclusions... 3 Finding and Recommendation.5 Appendix A..8 Division Response 11

Report: A-1112DEP-058 Overview In accordance with the (CS12042709P) between the State of Florida Department of Environmental Protection (Department) and the City of Apalachicola (City), the Office of Inspector General (OIG) conducted a review of the City s Water and Sewer Department s revenues and expenses. This audit was initiated at the request of Division of Water Resource Management. Scope and Objectives The scope of this review included an examination of the City s Water and Sewer related revenues and expenses for the period October 1, 2007 through March 31, 2012. Specifically, the objectives were to determine: 1. Gross revenues received by the City and related expenses for the ownership and operation of its Water and Sewer System; and 2. The use and purpose of funds transferred out of the Water and Sewer Department funds. Methodology This audit was conducted under the authority of Section 20.055, Florida Statutes (F.S.). The audit was conducted according to the International Standards for the Professional Practice of Internal Auditing, published by the Institute of Internal Auditors. This audit included tests of City records related to its Water and Sewer Department, as well as interviews with management. Information provided by the City Administrator was used to evaluate revenue and expense related activities. Our review of procedures included the following: Review of City General Ledger activities for the Fiscal Years (FY) 2007-2008, 2008-2009, 2009-2010, 2010-2011, and 2011-20121. 1 The period reviewed in FY 2011-2012 included October 1, 2011 through March 31, 2012. November 20, 2012 Page 1 of 12

Interviews with the City Clerk and City Administrator. Tests of support documentation for the FY 2010-2011 General Ledger. Background The Department and the City entered into a State Revolving Fund Loan Agreement (CS12042709P) on December 29, 1994. The loan agreement provided funding to the City for wastewater treatment facility improvements. The City entered into an Escrow Agreement with Capital City Trust Company on January 6, 1995 in order to provide a legislative appropriated funding source to assist with loan repayments. From this agreement, the Department has deposited State of Florida Appropriations to the City Debt Repayment Account. The deposited funds, plus investment earnings, have been used to make semiannual loan payments. On November 24, 2008, the Department entered into a Clean Water State Revolving Fund Debt Purchase Agreement with the City to develop a payment plan for the remaining unpaid loan principal amount of $6,165,611.00. As part of this agreement, the City was to establish a Debt Service Account with a Depository and make monthly deposits to support its share of the required semiannual loan repayment. These deposits would include pledged revenues from the City for its share of the debt. The pledged revenues were to be generated from the operation of the City s Water and Sewer Systems after payment of the operation and maintenance expenses and the satisfaction of all yearly payment obligations on account of the debt obligations (Water and Sewer Revenue Bonds, Series 1983, and Water and Sewer Revenue Bonds, Series 1986). As part of the Debt Repayment Agreement, the City was to maintain rates and charges for services furnished by the Water and Sewer Systems which were to be sufficient to provide revenues equal or exceeding 1.15 times the sum of the City s share of the semiannual payments. The City passed an ordinance in May 2008 to raise its Water and Sewer rates by 3% annually. This review was requested from the Division to determine the City s Water and Sewer revenues and operating expenses to gain an understanding of the City s ability to contribute to debt repayment under the current agreement. November 20, 2012 Page 2 of 12

Results and Conclusions Water and Sewer Department Revenues and Expenses According to the Debt Purchase Agreement, the City is to keep an account of the Water and Sewer Systems separate from all other accounts and keep accurate records of all revenues and operating expenses relating to the Water and Sewer Systems. The City was to keep an account of Pledged Revenues, Supplemental Pledged Revenues, and disbursements under the agreement and an account of the Debt Service Account. Pledged Revenues are revenues pledged as security for repayment of the debt on deposit in the Debt Repayment Account. According to the City Clerk, this account has not been established. Supplemental Revenues are revenues generated from the operation of the Water and Sewer Systems after payment of the operation and maintenance expenses and the satisfaction of all yearly debt obligations from the Water and Sewer Revenue Bonds, Series 1983, and Water and Sewer Bonds, Series 1986. The City s General Ledger documents these Supplemental Revenues. Based on the City s general ledger as well as interviews with the City Clerk and City Administrator, the following table represents the City s Water and Sewer Department revenues after operation and maintenance expense and the satisfaction of prior bond obligations. City of Apalachicola Revenues and Expenditures Water and Sewer Departments Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) (Source: City of Apalachicola General Ledger) Year 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 2 Water and Sewer Revenue 1,180,800.79 1,221,204.54 1,261,327.85 1,431,691.38 592,915.86 Prior Bond Obligations: USDA Bond 1983 Sinking; Sinking and Reserve 2003 Bond Issue (Series1986) 194,400.00 210,000.00 196,600.00 204,800.18 107,400.00 Total Water Department Expenses 481,434.16 395,309.36 380,825.08 557,355.87 218,263.07 Total Sewer Department Expenses $588,228.43 $662,566.25 $739,281.71 $703,908.63 $306,756.49 3 Revenues after Operation and Maintenance Expense, and -$83,261.80 -$46,671.07 -$55,378.94 -$34,373.30 -$39,503.70 2 Fiscal Year 2011-2012 represents activities from October 1, 2011 through March 31, 2012. 3 Revenues represent earnings before interest, taxes, depreciation, and amortization (EBITDA) This calculation gives a measure of the City s Water and Sewer Department cash flow position. November 20, 2012 Page 3 of 12

Satisfaction of Prior Bond Obligations The City bundles Water, Sewer, and Garbage fees in its utility billings. For the purpose of this review, Garbage revenues and expenses were excluded. For each fiscal year in this review, expenses and prior bond obligations exceeded revenues. The City passed an ordinance in May 2008 to raise its Water and Sewer rates by 3% annually. According to the City Clerk, this increase has been implemented. Increases are included in revenues supported by the General ledger. A detailed schedule of these revenues and expenses is contained in Appendix A. We tested amounts contained in the FY 2010-2011 General Ledger. The amounts included in our sample month testing agreed with related support documentation. Specifically, revenues were supported by daily bank deposit worksheets and deposit slips. Monthly salary amounts were supported by payroll disbursement sheets, monthly retirement and insurance expense reports, and disbursement records to Water and Sewer employees. Utility payments were traced to canceled checks and payment documents for system upgrade project expenses were traced to payment documents. Administrative Transfers Each year, the City has transferred funds from Water and Sewer revenues to support the City s general administrative support expenses. See the following table. Year 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 Administration Expenses (General Government Transfers) $0 $50,000 $100,000 $117,280 $90,000 Funds transferred out of the Water and Sewer Departments were listed in the General Ledger, but could not be traced to support documentation. Based on interviews with the City Clerk, the use and purpose of these transfers are to support indirect general government expenses related to the Water and Sewer Department. During the course of this review, the City Clerk developed a summary of general government administrative transfers to support amounts transferred. This summary included a percentage of the salaries for the City Administrator, City Clerk, Payroll Clerks, Mayor, Commissioners, Grants Staff, and Inmate Crew staff. It also included prorated costs for office supplies. The amounts in the summary totaled $142,309 annually, which exceeds the amounts transferred according to the General Ledger. November 20, 2012 Page 4 of 12

Finding and Recommendation Debt Repayments The between the Department and the City was developed as a payment plan for the remaining unpaid loan principal amount of $6,165,611.00. In this Agreement, the City agreed to establish a Debt Service Account with a Depository and make monthly deposits to support its share of the required semiannual loan repayment. Revenues for this purpose were to be generated from the operation of the City s Water and Sewer Systems after payment of the operation and maintenance expenses and the satisfaction of all yearly payment obligations on account of the debt obligations (Water and Sewer Revenue Bonds, Series 1983, and Water and Sewer Revenue Bonds, Series 1986). As of the time of this audit, the Debt Service Account has not been established. According to the Agreement, the semiannual payment for the loan was $225,898.16. This payment was to be made from the Debt Repayment Account in December 2008 and June 2009. Beginning in December 2009, the semiannual payment was to be divided, with $117,076.16 of the City s share coming from the Debt Service Account, and $108,822.00 being paid from the Debt Repayment Account. As of June 2012, the City has not made any of its share of the debt repayments. The entire amount of the required semiannual repayments has been made from the Debt Repayment Account. The lack of contribution by the City has resulted in $702,456.96 ($117,076.16 X 6) being drawn from the Debt Repayment Account in excess of planned contributions. Going forward, funds available from the Debt Repayment Account will not be sufficient to support continued excess distributions due to the lack of contribution by the City. As part of the Debt Repayment Agreement, the City was to maintain rates and charges for services furnished by the Water and Sewer Systems which were to be sufficient to provide revenues equal or exceeding 1.15 times the sum of the City s share of the semiannual payments. The City passed an ordinance in May 2008 to raise its Water and Sewer rates by 3% annually. However, with the current listing of Water and Sewer Department expenses, as well as administrative transfers, this increase has not provided the City sufficient funds to make its share of the debt payments. See summary below and detailed summary in Appendix A. November 20, 2012 Page 5 of 12

Year 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 4 Revenues after Operation and Maintenance Expense, and Satisfaction of Prior Bond Obligations -$83,261.80 -$46,671.07 -$55,378.94 -$34,373.30 -$39,503.70 Given the current documented revenues, bond obligations, operating expenses, and administrative transfers, the City s use of funds related to the Water and Sewer Department does not fully sustain its operations in order to make its required debt repayment. Recommendation: We recommend the Department require the City to make operational changes necessary to submit its share of the semiannual debt repayment amounts. The Department should require the City to demonstrate that its rates and charges for services are sufficient to provide revenues equal or exceeding 1.15 times the sum of the City s share of the semiannual payments as required in the Debt Repayment Agreement. Further, as part of monitoring this corrective action, we recommend the Department require the City to report establishment of the Debt Service Account, as required in the Debt Repayment Agreement, and report the required monthly deposits to the Account. Lastly, in order to avoid an untimely depletion of the Debt Repayment Account, we recommend the Department work with the City to establish an additional payment plan to recover payments originally due from the City s Debt Service Account that were covered in excess by the Debt Repayment Account. As of June 2012, these payments totaled $702,456.96 5. 4 Revenues represent earnings before interest, taxes, depreciation, and amortization (EBITDA) This calculation gives a measure of the City s Water and Sewer Department cash flow position. 5 This amount does not include any interest calculations that may apply. November 20, 2012 Page 6 of 12

To promote accountability, integrity and efficiency in state government, the OIG completes audits and reviews of agency programs, activities, and functions. Our audit was conducted under the authority of section 20.055, F.S., and in conformance with the International Standards for the Professional Practice of Internal Auditing, published by the Institute of Internal Auditors, and Principles and Standards for Offices of Inspector General, published by the Association of Inspectors General. The audit was conducted by Valerie Peacock and supervised by Candie Fuller. Please address inquiries regarding this report to the OIG s Audit Director by telephone at (850) 245-3151. Copies of final reports may be viewed and downloaded via the internet at http://www.dep.state.fl.us/ig/reports.htm. Copies may also be obtained by telephone (850) 245-3151, by fax (850)245-2994, in person or by mail at Department of Environmental Protection, Office of Inspector General, 3900 Commonwealth Boulevard, Mail Station #41, Tallahassee, FL 32399. Valerie J. Peacock, Director of Auditing Candie M. Fuller, Inspector General November 20, 2012 Page 7 of 12

Appendix A City of Apalachicola Revenues and Expenditures of the Water and Sewer Departments (According to General Ledger) Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 Water & Sewer Revenues Water and Sewer Receivable 1,141,541.06 1,192,359.90 1,236,486.38 1,426,685.31 592,405.41 Water and Sewer Taps Receivable 8,950.00 5,056.52 2,280.00 1,850.00 386.50 Water and Sewer Interest 1,099.73 674.12 221.47 456.07 123.95 Water Taps 19,960.00 12,384.00 11,610.00 2,700.00 Sewer Taps 9,250.00 10,730.00 10,730.00 0.00 Total Water and Sewer Revenue 1,180,800.79 1,221,204.54 1,261,327.85 1,431,691.38 592,915.86 Water & Sewer Expenses USDA Bond 1983 Sinking Fund 46,800.00 50,400.00 46,000.00 48,200.18 27,600.00 Sinking 2003 Bond Issue 1986 132,000.00 144,000.00 135,000.00 141,000.00 72,000.00 Reserve 2003 Bond Issue 1986 15,600.00 15,600.00 15,600.00 15,600.00 7,800.00 Total Bonds 194,400.00 210,000.00 196,600.00 204,800.18 107,400.00 November 20, 2012 Page 8 of 12

Appendix A Continued 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 Water Department Expenses Salaries 57,229.65 144,255.60 127,710.71 87,137.17 69,457.49 Overtime 5,950.49 9,706.17 12,099.10 8,731.72 5,254.08 Social Security 4,316.45 10,450.53 9,769.80 6,665.85 5,474.76 Overtime Social Security 450.48 747.34 1,016.32 668.02 401.93 Retirement 6,230.04 15,908.80 13,356.97 6,776.00 2,986.18 Group Insurance 12,921.40 34,756.94 27,414.30 21,124.18 13,693.98 Workers Comp 5,613.00 5,703.00 Audit Services 3,000.00 3,000.00 5,000.00 5,000.00 5,000.00 Water Contract Service 271,161.16 Water Tap Installation 2,250.00 Travel & Training 666.07 575.88 Communications 1,385.77 3,614.79 2,437.41 2,702.21 1,381.30 Utilities 37,328.24 41,351.71 41,235.88 42,222.61 23,261.78 Liability/Property Insurance 26,904.00 36,464.00 23,078.00 14,297.00 2,000.00 Repairs & Maintenance 14,787.05 23,729.65 29,861.59 38,974.96 5,846.62 Testing 1,035.00 5,955.00 3,200.00 4,610.00 6,675.94 Fire Hydrant Maintenance 42.95 1,199.75 Tank Maintenance 2,400.00 Water Meter Maintenance 4,745.99 Dues & Fees 2,545.00 2,075.00 Misc Expenses 1,565.92 977.60 3,620.07 USDA Wt Project Exp (Waster System upgrades) 53,489.21 AWT Expense (Upgrades to Water/Sewer Plant) 154,122.09 Supplies 23,378.03 26,138.93 37,579.89 30,830.57 14,438.86 Gas & Oil 6,616.29 6,284.28 8,075.72 7,065.77 3,121.40 Equipment Below $750 374.94 872.38 2,403.52 Equipment Above $750-0.17 1,000.00 Uniforms 130.64 914.70 969.00 979.92 Administration (General Government) 25,000.00 25,000.00 58,640.00 45,000.00 Truck/Tractor Payment 4,549.25 5,965.17 1,438.10 4,372.49 1,292.21 Total Water Department Expenses 481,434.16 395,309.36 380,825.08 557,355.87 216,263.07 November 20, 2012 Page 9 of 12

Appendix A Continued 2007/2008 2008/2009 2009/2010 2010/2011 2011/2012 Sewer Department Expenses Salaries 61,839.00 188,033.14 194,137.63 191,648.65 57,298.16 Overtime Salaries 7380.58 42,927.57 24,389.58 25,237.19 8,451.06 Social Security $4,654.22 13,926.37 14,656.78 14,665.28 4,383.40 Overtime Social Security $564.18 3,284.49 1,775.13 1,930.65 646.51 Retirement $6,513.80 20,516.64 23,284.81 25,961.43 2,638.84 Group Insurance $11,720.73 41,620.15 34,718.82 24,025.22 9,214.50 Legal Services 12,379.45 7,182.09 Auditing Services $3,000.00 3,000.00 5,000.00 5,000.00 5,000.00 Sewer Contract Service $277,089.08 Sewer Tap Installation $900.00 Management Fees $9,422.00 8,254.00 7,233.00 Communications $1,097.61 4,714.37 5,518.26 6,035.14 3,368.04 Utilities (Treatment Plant Power Bill) $83,062.64 94,770.23 105,655.31 101,878.01 49,991.66 Liability/Property Insurance $31,932.00 27,593.02 28,268.00 32,267.87 20,000.00 Repairs and Maintenance $7,887.46 25,455.78 43,324.33 53,243.53 25,191.07 Testing $16,214.03 66,787.84 68,528.36 64,172.42 38,252.35 Dues and Fees 10,136.00 100.00 Supplies $45,877.23 72,944.18 81,690.55 73,779.45 29,441.15 Gas and Oil $4,689.01 7,655.53 9,305.64 9,676.62 3,122.03 Equipment Below $750 $1,231.30 931.88 2,744.56 169.00 399.00 Equipment Above $750 1,615.00 Uniforms 247.84 1,049.56 968.99 1,100.27 Administration (General Government) 25,000.00 75,000.00 58,640.00 45,000.00 Truck/Tractor Payment $2,250.00 3,220.88 4,372.38 1,292.17 Miscellaneous Expenses $10,854.15 2,475.00 2,448.42 65.61 89.50 Deposit Trust Miscellaneous Expenses $49.41 48.77 150.00 35.19 161.78 Total Sewer Department Expenses $588,228.43 $662,566.25 $739,281.71 $703,908.63 $306,756.49 Revenues after Operation and Maintenance Expense, and Satisfaction of Prior Bond Obligations -$83,261.80 -$46,671.07 -$55,378.94 -$34,373.30 -$39,503.70 November 20, 2012 Page 10 of 12

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